Capital Dividend Account (CDA)

Definition

The Capital Dividend Account (CDA) is defined in ITA s.89(1) and is a notional account available only to private corporations resident in Canada. It aggregates certain non-taxable receipts, most notably the untaxed portion of capital gains and the proceeds of life insurance policies net of the policy's adjusted cost basis. A corporation can elect under ITA s.83(2) to pay a capital dividend to its shareholders, which is received tax-free.

Key rules

• Private corporation only: public corporations cannot maintain a CDA.
• CDA additions include:
  1. The non-taxable portion of net capital gains (typically 50% of the gain under the current inclusion rate regime).
  2. The non-deductible portion of capital losses offsets CDA (so net capital gains only).
  3. Life insurance proceeds received on the death of an insured, less the adjusted cost basis (ACB) of the policy.
  4. Capital dividends received from other corporations.
  5. The non-taxable portion of gains from eligible capital property dispositions (pre-2017 legacy).
• CDA reductions:
  1. The non-deductible portion of capital losses.
  2. Capital dividends paid.
• Election (ITA s.83(2)), Form T2054: must be filed by the earlier of the day the dividend becomes payable and the first day any part is paid. Must include a certified copy of the directors' resolution and a CDA calculation as of the dividend date.
• Late filing: a late election is permitted under ITA s.83(3.1) with a penalty equal to the lesser of 1% of the dividend per month and $500 per month, capped at $12,000.
• Excess election penalty (ITA s.184(3)): if the elected amount exceeds the CDA balance, a 60% Part III tax applies unless a s.184(3) election is filed to treat the excess as an ordinary taxable dividend to the shareholders.

Inclusion rate note (2026)

The capital gains inclusion rate for 2026 is 50% for individuals and corporations under current law as of the date of this article. Capital gains add to CDA using whatever non-taxable fraction is in effect when the gain is realized. Verify the current inclusion rate for any gain, because legislative changes during 2024–2026 proposed but did not fully enact a higher inclusion rate.

Example

Pacific Realty Inc. (a CCPC) sold investment land in March 2026 for $1,000,000. The land had an ACB of $400,000.

• Capital gain: $600,000.
• Taxable capital gain (50%): $300,000, included in AAII and taxed at general-rate investment rates. Refundable Part I tax of 30⅔% adds to NERDTOH (see ).
• Non-taxable half: $300,000, added to CDA.

Pacific Realty holds a key-person life insurance policy on its founder. In November 2026 the founder passes away and the corporation receives $2,000,000 of insurance proceeds. The policy's ACB on the date of death is $150,000.

• CDA addition: $2,000,000 − $150,000 = $1,850,000.

Combined CDA balance after both events: $300,000 + $1,850,000 = $2,150,000.

On December 15, 2026, the directors resolve to pay a $2,000,000 capital dividend. They file Form T2054 with the director's resolution and CDA worksheet.

Shareholder treatment: the capital dividend is received tax-free. No gross-up, no DTC, no entry on the shareholder's T1.

Remaining CDA after payment: $2,150,000 − $2,000,000 = $150,000.

Common mistakes

• Filing the s.83(2) election late without using s.83(3.1). CRA will reassess the full dividend as an ordinary taxable dividend.
• Electing a capital dividend larger than the CDA balance. Part III tax of 60% is punitive. Always recalculate CDA at the dividend payment date, not the resolution date.
• Ignoring the insurance ACB. Only the excess of proceeds over ACB enters CDA; the ACB portion does not.
• Forgetting that capital losses reduce CDA dollar-for-dollar, not just net against capital gains in the same year.
• Paying a capital dividend from a public corporation or a corporation that is not resident in Canada. CDA is not available.
• Missing the T2054 documentation. CRA requires the directors' resolution, CDA schedule, and in most cases a completed Schedule 89 supporting the calculation.

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